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Sept. 22 — Two employees of a company selling Verizon Wireless service plans and merchandise don't have to arbitrate their wage and benefits claims covering a time period in which the company said the workers were independent contractors, the U.S. Court of Appeals for the Second Circuit ruled Sept. 22.

Affirming a district court's denial of arbitration to Cellular Sales of New York LLC and Cellular Sales of Knoxville Inc., the court said an arbitration clause contained in compensation agreements that Timothy Pratt and William Burrell signed in January 2012 doesn't apply to the workers' claims for wages and benefits before that date.

For about 18 months prior to 2012, Pratt and Burrell worked for Cellular Sales under a company-required arrangement in which the two workers formed their own companies and Cellular Sales contracted for their services in its retail stores. Those sales agreements said Pratt and Burrell were independent contractors and expressly disclaimed any employment relationship.

Along with other Cellular Sales workers, Pratt and Burrell in 2013 sued under the Fair Labor Standards Act and New York state law, alleging they actually were “employees” during their independent contractor days and the company owes them minimum wages, overtime pay and other benefits.

Cellular Sales moved to compel arbitration of Pratt and Burrell's claims for the 2010-2011 period, citing the compensation agreements the parties signed in January 2012, which said they were employees and all employment-related disputes must be submitted to arbitration.

On an interlocutory appeal from the denial of arbitration, the Second Circuit said the workers' evidence regarding their prior sales agreements with Cellular Sales overcomes the presumption of arbitrability.

Citing contract law principles, the court said the company can't rely on the arbitration clause in the compensation agreements, which expressly defined Pratt and Burrell as employees, to require arbitration of claims arising when the two workers were covered by a different agreement.

Those prior agreements between Cellular Sales and Pratt and Burrell's corporate entities expressly dubbed the workers as independent contractors and didn't require arbitration to resolve disputes, the court said.

Prior Conduct Shows Different Intent

On appeal, Cellular Sales argued the arbitration clause permits an interpretation that covers the 2010-2011 wage and benefits claims because Pratt and Burrell allege they actually were company employees during that period.

In response, Pratt and Burrell said their prior sales agreements and the parties' conduct provide “positive assurance” the parties didn't intend the arbitration agreement to apply to claims arising when Cellular Sales labeled the workers as independent contractors.

The Second Circuit previously has held that “broad arbitration provisions” with no express temporal limitation can apply to claims that arose before the arbitration agreement was signed, the court acknowledged.

But “[w]e are not persuaded by [Cellular Sales's] argument that we must interpret the arbitration agreement here to have an expansive temporal scope simply because the court has done so in other cases,” Judge Richard C. Wesley wrote. “Instead, the correct approach is to assess whether the parties intended for the arbitration clause to cover the present dispute.”

Applying that approach, “the presumption of arbitrability is overcome because we find positive assurance that the arbitration clause's scope—at least insofar as it concerns the promise to arbitrate matters arising out of, or in relation to [the] employee's employment—is temporally limited,” the court said.

That conclusion follows “in large part” because when the 2012 compensation agreements were signed, “the parties' contractual positions changed in a way that impacted arbitrability,” the court said.

Under the prior agreements covering Pratt and Burrell, Cellular Sales agreed with the sales companies that the workers had formed that Pratt and Burrell weren't employees, the court said. But less than two years later, Cellular Sales agreed to employ the two workers, the court said.

“This evolving business relationship is directly relevant to whether the parties intended to have an employment relationship prior to executing the compensation agreement,” Wesley wrote. “It would be inconsistent with the parties' conduct to construe the compensation agreement, which referenced ‘employment,' to apply to a period when the parties themselves did not contemplate such a relationship. [Cellular Sales's] change in course is just the type of positive assurance required to show that the parties did not intend for the arbitration clause to cover the current dispute.”

No Retroactive Application

The underlying dispute over the alleged misclassification of employees and unpaid wages and benefits also isn't related to the compensation agreements, the court said.

Rather, Cellular Sales has maintained Pratt and Burrell were independent contractors and the company may attempt to use the sales agreements to prove that point, the court said.

“This dispute is about events that transpired when the sales agreements were in effect, and these contracts have their own dispute resolution mechanism,” the court said. “After [Cellular Sales] affirmatively stated that Pratt and Burrell were not employees for over a year, it rings hollow for them to now argue that the parties intended the word ‘employment' in the compensation agreements to apply retroactively to this dispute.”

“Finding positive assurance that the parties did not intend for the arbitration agreement to be retroactive, we affirm the district court's denial of the motion to compel arbitration,” the court said.

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